BANKRUPTCY is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

Bankruptcy legislation recently passed both chambers and will make relief less comprehensive and less available to individual debtors. On March 15, 2001 the Senate voted 83-15 to pass the bill, which will make the most sweeping changes to the U.S. bankruptcy system in almost a quarter of a century. A similar measure cleared the House of Representatives on March 1 and President George W. Bush indicated he would sign it into law. The two bills will first have to be reconciled by congressional negotiators.

The House bill — a carbon copy of last year’s version — is aimed at stopping consumers from dissolving debts they can afford to repay. It would establish a “needs-based” formula that would determine whether debtors can pay off part of their debt under court supervision. Those earning at or above the median for their state would have to make good on at least part of their obligations.

Replaces the presumption in favor of granting the relief sought by the debtor with a presumption that abuse exists if the debtor's current monthly income exceeds an amount determined according to specified formulae. Provides that the presumption of abuse may only be rebutted with detailed documentation of special circumstances requiring additional expenses or adjustment of currently monthly total income for which there is no reasonable alternative.

Includes within the calculation of debtor's monthly expenses: (1) those expenses incurred to maintain the safety of the debtor and the debtor's family from family violence as identified under the Family Violence Prevention and Services Act or other applicable Federal law; (2) public as well as private school expenses; and (3) continuation of actual expenses paid by the debtor for the care and support of an elderly, chronically ill, or disabled household or non-dependent immediate family member.

Redefines "disposable income" of a chapter 13 debtor to exclude such debtor's domestic support obligation that first becomes payable after the date the petition is filed.

What Can Bankruptcy Do for Me?

Bankruptcy may make it possible for you to:

• Eliminate the legal obligation to pay most or all of your debts. This is called a ''discharge'' of debts. It is designed to give you a fresh financial start.
• Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
• Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
• Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt. Restore or prevent termination of utility service.
• Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

What Bankruptcy Cannot Do: Bankruptcy cannot, however, cure every financial problem.

Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

• Eliminate certain rights of ''secured'' creditors. A ''secured'' creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt.
• Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, some student loans, court restitution orders, criminal fines, and some taxes.
• Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the co-signer may still have to repay all or part of the loan.
• Discharge debts that arise after bankruptcy has been filed.

What Different Types of Bankruptcy Cases Should I Consider?

There are four types of bankruptcy cases provided under the law:

1. Chapter 7 is known as ''straight'' bankruptcy or ''liquidation.'' It requires a debtor to give up property which exceeds certain limits called ''exemptions'', so the property can be sold to pay creditors.
2. Chapter 11, known as ''reorganization'', is used by businesses and a few individual debtors whose debts are very large.
3. Chapter 12 is reserved for family farmers.
4. Chapter 13 is called ''debt adjustment". It requires a debtor to file a plan to pay debts (or parts of debts) from current income.

Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly. Chapter 7 (Straight Bankruptcy) In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts.

The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for ''exempt'' property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.

Who can file Chapter 7 bankruptcy?

You must reside or have a domicile, a place of business, or property in the United States or a municipality. You must not have been granted a Chapter 7 discharge within the last 6 years or completed a Chapter 13 plan. You must not have had a bankruptcy filing dismissed for cause within the last 180 days. It must not be a "substantial abuse" of bankruptcy to grant the debtor relief. Last, It would not be fundamentally unfair to grant the debtor relief under Chapter 7 or Chapter 13.

Generally speaking, if after you pay the monthly expenses for necessities there is not enough money to pay the remaining monthly debts, then granting a discharge would not be an abuse of Chapter 7.

Chapter 13 (Reorganization) In a chapter 13 case you file a ''plan'' showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your home and car--which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.

You should consider filing a chapter 13 plan if you:

(1) own your home and are in danger of losing it because of money problems;

(2) are behind on debt payments, but can catch up if given some time;

(3) have valuable property which is not exempt, but you can afford to pay creditors from your income over time. You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due.

There are several situations where a chapter 13 is preferable to a chapter 7.

A chapter 13 bankruptcy is normally for people who have too much income to file a Chapter 7 bankruptcy or have the kind of debt that is non- dischargeable in a Chapter 7 (e.g. certain taxes). Also, people file Chapter 13 because they are behind on their mortgage or business payments and are trying to avoid foreclosure. A chapter 13 bankruptcy allows them to make up their overdue payments over time and to reinstate the original agreement. Also, where a debtor has valuable nonexempt property and wants to keep it, a chapter 13 may be a better option.

However, for the vast majority of individuals who simply want to eliminate their heavy debt burden without paying any of it back, Chapter 7 provides the most attractive choice.

What Does It Cost to File for Bankruptcy?

Pursuant to Public Law No. 106-113, there will be an increase of $25.00 in the filing fees for bankruptcy cases filed under Chapter 7 and Chapter 13, effective December 29, 1999.

As of December 29, 1999, filing fees will be collected as follows: Chapter 7- $200.00; Chapter 13- $185.00; Chapter11- (Non R-R) $830.00; Chapter 11 (R-R)- $1,030.00; Chapter 12- $230.00; Chapter 9- $330.00. The court may allow you to pay this filing fee in installments if you cannot pay all at once. If you hire an attorney you will also have to pay the attorney's fees you agree to.

What Property Can I Keep? In a chapter 7 case, you can keep all property which the law says is ''exempt'' from the claims of creditors. [Note to the Attorney-Reader: Part of this answer is accurate for states that permit the federal exemptions. Some states allow you to choose exemptions between your state law or under federal law. (property may be exempted under subsection (b)(1) of Section 522(d) U.S. Bankruptcy Code) For states which have opted out of federal exemptions, the answer must be adapted to indicate that the debtor's exemptions are those specified by state law. In any bankruptcy proceeding, "residents of [Illinois] shall be prohibited from using the federal exemptions provided in Section 522(d) of the Bankruptcy Code of 1978 (11 U.S.C. 522(d)), except as may otherwise be permitted under the laws of Illinois." (735 ILCS 5/12-1201)]

Illinois law permits you to retain as "exempt" up to $7,500 of equity in your residence and up to $1,200 in value in your car. In addition, you may keep up to $2,000 in personal property such as cash and furniture and all your necessary clothing, books and family pictures. You may also keep up to $750 in any implements, professional books or tools of the trade as well as all professionally prescribed health aids for you or your family. Additional exemptions are available and the amounts of these exemptions may change from time to time. However, to avail yourself of these "exemptions" you must properly request them in your bankruptcy case. These exemptions are available to each individual so if both you and your spouse file a bankruptcy case each of you would be entitled to these exemptions.

Exemptions: Illinois has opted out of Federal exemptions
In general, a debtor may claim exemption of his homestead and certain personal property from attachment and execution of a judgment, or in a bankruptcy proceeding.

The State of Illinois permits a judgment debtor to claim homestead exemption up to an amount of $7,500* in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise, and occupied by him or her as a residence. If two or more individuals own property that is exempt as a homestead, the value of the exemption of each individual may not exceed his or her proportionate share of $15,000 based upon the percentage of ownership. (735 ILCS 5/12-901)

*Current legislation-Homestead Exemption: Senate Bill 1234 (O'Malley; R-Alsip) would amend the Code of Civil Procedure to increase the homestead exemption from $7,500 to $30,000.

Personal property which may be exempt from levy or sale upon execution, writ of attachment or any process issuing out of any court in the State of Illinois may include wearing apparel, bible, school books, and family pictures of the debtor and dependents; equity interest in any other property not to exceed $2,000 in value; interest in any one motor vehicle not to exceed $1,200 in value; equity interest in any implements, professional books, or tools of the trade not to exceed $750 in value; professionally prescribed health aids; life insurance proceeds; social security benefits; veteran's benefits; disability, illness or unemployment benefits; and alimony, retirement plan proceeds. (735 ILCS 5/12-1001, et seq.)

In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth now. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also only need to look at your equity in property. This means that you count your exemptions against the full value minus any money that you owe on mortgages or liens.

For example, if you own a $50,000 house with a $40,000 mortgage, you count your exemptions against the $10,000 which is your equity if you sell it. While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn't file bankruptcy.

What Will Happen to My Home and Car If I File Bankruptcy?

In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13. However, some of your creditors may have a ''security interest'' in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt.Bankruptcy does not make these security interests go away. If you don't make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.

There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.

Can I Own Anything After Bankruptcy?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions. Bankruptcy will not normally wipe out: (1) money owed for child support or alimony, fines, and some taxes; (2) debts not listed on your bankruptcy petition; (3) loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan; (4) debts resulting from ''willful and malicious'' harm; (5) student loans owed to a school or government body, except if: -- the court decides that payment would be an undue hardship; (6) mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

A discharge in Chapter 7 will not affect some of your debts such as alimony, child support, certain taxes, fines, certain debts arising from educational loans, and debts you fail to disclose properly to the bankruptcy court. At the request of a creditor, the bankruptcy judge may also exclude from your discharge debts resulting from loans you received by giving a lender a false financial statement as well as debts arising from fraud, embezzlement, drunken driving, larceny or certain other willful or malicious acts. (See, Title 11 - Bankruptcy Sec. 523. Exceptions to discharge )

Discharging Student Loans

As of October 7, 1998, Student Loans are only dischargeable if:

1. You can prove that having to repay it would impose an "undue hardship" on you (this is very rarely granted by courts and the burden of proof is substantial), OR,

2. If the PROGRAM under which your student loan is issued, insured, administered is a FOR-profit, PRIVATE (non-government) entity, it may be dischargeable. (If the program itself, such as LAL, GSL, etc. receives nonprofit funding by participation of nonprofit entities, the loan is not dischargeable in bankruptcy) By using the broad language "made under any program funded in whole or in part by . . . a nonprofit institution," Congress intended to include within section 523(a)(8) all loans made under a program in which a nonprofit institution plays any meaningful part in providing funds.The plain language of § 523(a)(8) indicates that it is the program that need be funded by a nonprofit institution. Section 523(a)(8) does not define "program," but the use of the modifier "any" suggests a broad definition. Congress did not use language indicating that the loan itself must be funded by a nonprofit institution, but that the program pursuant to which the loan was made be funded in part by a nonprofit institution. (See, In re Pilcher, 149 B.R. 595 (9th Cir. BAP 1993)

To prove undue hardship one basically has to show the following:

1. that you cannot maintain, based on current income and expenses, a 'minimal' standard of living for yourself and your dependents if forced to repay the loans;
2. that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and,
3. that you made good faith effort to repay the loans, for example, by past payments for several years, etc. Making payments is not always required if you didn't ever have the money to pay the loans. Forebearances may be sufficient.

Although "undue hardship" is not defined in the Bankruptcy Code, courts have recognized that " `[t]he existence of the adjective `undue' indicates that Congress viewed garden-variety hardship as insufficient excuse for a discharge of student loans. Courts require more than temporary financial adversity, but typically stop short of utter hopelessness". (See, Matter of Roberson, 999 F.2d 1132 (7th Cir. 1993).)

Absent a showing of substantial hardship, that will allow the discharge of the loan in whole or in part, the best that bankruptcy can do with respect to student loans may be to eliminate other debts that compete for the borrower's dollars, or to provide a measure of peace during a Chapter 13 plan. Some courts will permit debtors to separately classify student loans in Chapter 13 and pay them a greater percentage than other non-secured debt.

Will Filing Bankruptcy Stop My Bill Collectors from Taking Action?

Yes. When you file bankruptcy, federal law imposes an "automatic stay" which prohibits your creditors from taking any action to collect debts against you including court judgements and tax debts during the pendency of the bankruptcy. For instance, if you have been served by one of your creditors to appear in court over a debt, the bankruptcy filing will stop this lawsuit.

Any wage garnishments or repossession efforts are also halted. However, once the bankruptcy is over, a creditor holding a claim that was not discharged may proceed to collect on the debt. Also, under some circumstances a secured creditor may proceed to collect on the lien he has on the filer's asset during the bankruptcy proceeding, but may only do so by filing a court motion and by getting the approval of the bankruptcy court first.

How quickly will my creditors get notice of my bankruptcy?

Within a couple of weeks of the filing of your petition, the bankruptcy court clerk mails your creditors notice of the filing and the imposition of the automatic stay. Until the creditors get notice, it may be necessary for you supply the creditor with the docket number and date of your bankruptcy. Once they have been given notice, they must stop collection efforts against you or may be liable for court sanctions. Thankfully, for the vast majority of people, once their bankruptcy petition is filed that is the last they hear from their unsecured creditors.

Will I Have to Go to Court?

In most bankruptcy cases, you only have to go to a proceeding called the ''meeting of creditors'' to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.

Will Bankruptcy Affect My Credit?

There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you've filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

What Else Should I Know?

Utility services--Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed. Discrimination--An employer or government agency cannot discriminate against you because you have filed for bankruptcy. Driver's license--If you lost your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back. Co-signers--If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt.